The pitfalls and perils of Kickstarter

Since 2008, Kickstarter has become the peg that unfunded startups hang their dreams on. The crowd-funding platform has been a beacon of hope for the ideas that potential investors wrote off, and a haven for consumers who want to personally and financially attach themselves to projects – and maybe feel a little bit like a Silicon Valley VC. But for all its inherent goodness, Kickstarter and crowd-funding come with a few caveats worth considering.

Crowd-funding can look like Craigslist

The bane and the boon of Kickstarter is the fact that it’s an open platform. Anyone can pitch anything – emphasis on anything. There are more silly waterproof iPad stands and Instagram-inspired products than this world needs. For every great idea, there are 10, 15, or even 20 head-scratching ones.

In theory, it’s all well and good that there’s an open forum for ideas. It spurs creativity and invites those who have been weeded out or ignored by the VC ecosystem as it currently exists. And there are some impressive concepts in there that deserve attention they otherwise wouldn’t have received — take, for instance, the Pebble Watch. It was rejected by VCs time after time, but once on Kickstarter, the concept smart watch became the highest grossest project yet, raising $4.9 million (with weeks left to go).

Kickstarter is home to Pebble and inspiring stories like it — but you can’t deny that they are the diamonds in the rough. There is a slippery slope element to the site: some of the ideas get crazier and crazier, more and more outlandish, until you can’t tell if you are browsing a crowd-funding site or the Services section of Craigslist. And sometimes the weaker parties can ruin it for the rest of us. If Kickstarter doesn’t get just a bit more discriminating about who gets to pitch on the platform, it runs the risk of being inundated with the things that the collective Internet can’t get enough of — and that means more ridiculous mustache stuff, people. Just remember: sometimes gatekeepers are necessary for keeping certain standards.

The creator’s dilemma

There’s a community element of Kickstarter. When you invest in a project, you feel close to it, like a part of its potential success. Unfortunately, actually ponying up the money is another story, and far too many don’t.

A recent Kickstarter project to fund an iOS and Android game called Star Command did incredibly well, easily meeting its $20,000 goal and then some. But it’s been anything but smooth sailing since. “To begin with, we didn’t get all of the $36,967 pledged dollars,” the team says via its Kickstarter page. “We lost about $2,000 to no-shows, just people that pledged and the funds did not transfer.” After Amazon Payments and Kickstarter took their respective cuts and the bills were paid, the startup found itself with $16,000.

Part of the problem is the rewards that are given to investors. Kickstarter projects promise rewards for your pledges, and credit-hungry donors love it. T-shirts for $10, early access for $50, samples for $75… the excitement surrounding the whole scheme can escalate what you’re willing to promise, and it’s not surprising that plenty of participants get swept up in it all.

This overselling can hurt a project’s future sales as well: if you promise everyone that pledges $100 a free copy of the game, who’s going to buy the game? Unless you raise well beyond your goal, you probably won’t have enough money to pay for an advertising campaign – Kickstarter was your advertising campaign.

All prestige, no privilege

There is a cyclical hurt to this, which can come back to bite those of us on the consumer end. Sometimes a product over-promises, and then you’re left with your faith shaken and money gone.

Earlier this year, Kickstarter aficionado Matt Haughey got burned by his backing of the i+Case iPhone 4 and 4S case. The incredibly minimalistic protector got the attention of Haughey and plenty of others. In case you’ve been living under a rock, there were some concerns about the iPhone 4 and later 4S antenna affecting connectivity. The i+Case team said their case wouldn’t cause any problems. Unfortunately, that turned out not true. They tried to alter the look of the case, were cagey about signal issues, and even requested more money for backers to get the product. Some didn’t even receive a case at all.

To top it all off, the final version wasn’t worth using. In January, Haughey wrote, “I got my own cool red case last week and today I assembled it. My phone normally gets 4-5 bars of Verizon coverage and 3 bars of Wi-Fi in my house. After finagling all the pieces and tiny screws into place, I flipped my iPhone over to admire the slick new case around it. I tried out the side buttons to conform they worked, and then I looked at my signal to see if I was one of the ‘few’ backers with signal problems the creators had a hard time reproducing.”

“I had one tiny bar of phone coverage and one tiny Wi-Fi blip. $70, down the drain as I disassembled the case, flipped my phone over to see it back to 5 bars plus 3 bars of Wi-Fi a minute later.”

Kickstarter is very clear to label those giving pledges as backers, not investors. Although the distinction might seem semantic, it must be clear that you don’t have much real stake in the future of the project. But while that might be monetarily true, there’s no way to keep you unemotionally attached: you sent in your money (or hopefully you did — don’t be one of those no shows) and you want it to get that product closer to shelves. You want to be a part of the roller coaster ride of productivity!

But let’s be honest here: you’re more a customer than an investor, and “backer” is actually a pretty generous term. Any time you buy anything, you could call yourself a backer — you’re contributing to that company’s financial well-being. But you’re getting something in exchange for your money, and its not a real stake in the company — it’s a sell-able good. That’s not the case with Kickstarter, and sometimes it’s going to end poorly, as it did in the i+Case incident.

So while you contribute your money, you still don’t get the privileges of an investor — and when the product doesn’t meet expectations, you don’t quite get to be treated like a real customer and get your dollars back. So there exists this strange, complicated, and sometimes frustrating relationship for those of us on the consumer end of Kickstarter.

Take the money and run

If you lean toward the critical side, then one of your biggest concerns should be how does the money side of Kickstarter work. Traditionally, primary investors get some insight on how a company’s money is being spent in the early days – how much goes to marketing, press art, freelancers, prototype materials, etc. But when your primary investors are thousands of Kickstarter users, that’s not the case. Sure, they get updated along the way, but creators aren’t quite as accountable.

In the case that a project exceeds its wildest pledge-raising expectations, where does the excess go? This happens fairly often, and while the optimist in all of us wants to assume it’d be used appropriately, there’s no system of checks and balances.

Should I kick Kickstarter?

It’s important to remember that Kickstarter is not a personal shopping site for newer-than-new products – it is a way for creators to fund their ideas. Both parties are to blame here: those on the consumer side forget that when they invest in something on Kickstarter they are giving money to a concept, not a market-vetted good. And you probably shouldn’t be doing it for the pledge reward alone. It could be incredibly disappointing.

And those funding their projects using the site need to keep in mind that all the renderings and concept videos in the world aren’t enough to guarantee what they are potentially selling. The over-promise just leads to bad press and a bleak future.

Kickstarter isn’t doomed — it remains one of the most creative and attention-worthy ways to approach, even disrupt, VC culture. That said, don’t take it entirely at face value. Investing is investing is investing: there are winners and there are losers, and just because these pitches are on the Internet and not in an office doesn’t mean they aren’t subject to many of the same rules.